First, credit where credit is due: Horwitz is perfectly correct that Hoover was not a liquidationist. Hoover is unfairly caricatured as an advocate of the extreme liquidationist solution to the Great Depression, a solution which was actually recommended by Andrew Mellon (US Treasury Secretary from 1921–1931). In truth, Hoover rejected extreme liquidationism, and attempted to fight the onset of the Great Depression with a number of limited interventions, including increased government spending. On this, Krugman is wrong to suggest that Hoover was a true liquidationist or that he advocated “savage spending cuts.” Horwitz gets this right, but the rest of his post is poor history without proper context.

Let us review the points Horwitz makes:

(1) First, some background. In the US, the fiscal year before 1976 ran from July 1 to June 30 in the next year. So in the relevant years the actual fiscal years were as follows:

“The 1929 budget was $3.1 billion, and Hoover’s first budget in 1930 had $3.3 billion in spending, followed by $3.6 billion, $4.7 billion, and $4.6 billion over the following three years.”

Yet Horwitz leaves out the following crucial points:

(i) In fiscal year 1930 (July 1, 1929 – June 30, 1930), as the depression became a very serious contraction indeed, Herbert Hoover actually ran a federal budget surplus, not a deficit. The net effect of federal fiscal policy on its own was contractionary, not expanionary. Hoover’s first deficit was in fiscal year 1931, when the US economy had already begun contracting severely.

(ii) The Federal Reserve raised the discount rate in 1931.

(iii) Hoover also cut spending in fiscal year 1933, and the net effect of federal fiscal policy in fiscal 1933 was contractionary against 1932. This was made worse by the Revenue Act of 1932 (June 6) which increased taxes across the board and applied to fiscal year 1932 and subsequent years (a measure which, curiously, Horwitz later mentions, but fails to understand properly). These were highly contractionary measures, and these two policies are the very antithesis of Keynesianism!

(iv) This leaves us with fiscal years 1931 and 1932. In both years it has long been known that federal fiscal policy was mildly expanionary, but not large relative to the GNP collapse. In 1931, for example, fiscal expansion included the Veterans’ Bonus Bill, but this was passed over Hoover’s objections. Hoover does not look like a big spending Keynesian on this score.

Now the budget may have expanded demand by 2% of GNP in 1931 more than the 1929 budget, but this was not large relative to the collapse of GNP, which is the key (Temin 1989: 27–28). In 1931, GNP collapsed by 16.11% relative to its level in 1930, from $91.2 billion to $76.5 billion. That is to say, in 1931, US GDP collapsed by $14.7 billion dollars, in a debt deflationary spiral with bank failures and a collapse in consumption, employment and investment. If we assume a multiplier of 4 (which is very high), then Hoover’s federal spending increase of $257 million dollars in fiscal year 1931 might have generated at most $1.028 billion of GDP in fiscal year 1931 (the effect of state and local fiscal policy reduced this, however). But GDP fell by $14.7 billion dollars, and it is the height of idiocy to seriously argue that Hoover’s increase in spending in fiscal year 1931 could have prevented the depression, to offset such a catastrophic fall in GDP. It could never have done any such thing.

Much the same applies to fiscal year 1932. In 1932, US GDP collapsed by $17.8 billion dollars. If we assume a multiplier of 4 again, in theory Hoover’s federal spending increase of $1.082 billion dollars might have generated $4.32 billion of GDP in fiscal year 1932 (in practice, state and local austerity, however, counteracted the effect of federal fiscal policy). But that was not even remotely enough to stop a collapse in GDP of $17.8 billion dollars.

(2) Horwitz continues:

“In nominal terms, [sc. Hoover] … increased spending 48 percent over the last budget of the previous administration. However, this period was one of significant deflation, so if we adjust for the approximately 10 percent per year fall in prices over that period, the real size of government spending in 1933 was almost double that of 1929.”

There is a crucial point Horwitz leaves out: in 1929, total federal spending was only about 2.5% of GNP (Stein 1966: 189–223). Government spending as a percentage of GNP rose in 1929–1933 mostly because GNP collapsed, not because Hoover radically increased government spending. Look at the actual annual increases in federal spending here:

Total spending was cut in 1933. If we look at the federal spending increases in the 1920s, 6–7% increases in fiscal 1930 and 1931 were not really much larger than the annual increases that had happened in the 1920s. There was nothing spectacular about Hoover’s spending increases in fiscal 1930 and 1931. In fiscal 1930, Hoover actually ran a budget surplus and drained money and contracted demand in America’s economy.

The only year that does stand out is fiscal 1932, where there was a 30.25% rise over fiscal 1931. But even here we are talking about an increase of only $1.08 billion in a year when GNP fell by $17.8 billion dollars. Hoover’s increase in fiscal 1932 was feeble and ridiculously small compared to the scale of the GNP decline.

(3) Horwitz:

“The budget deficits of 1931 and 1932 represented 52.5 percent and 43.3 percent of total federal expenditures. No year between 1933 and 1941 under Roosevelt had a deficit that large.”

I am not sure how the first figure was calculated. In fiscal 1931 the federal budget was $3.577 billion and the deficit was $0.5 billion. I calculate that the deficit was merely 13.97% of total federal expenditures in fiscal 1931. In fiscal 1932, the deficit was 57.9% of total federal expenditures. But this figure is grossly misleading without further context. The deficit was not large relative to the size of the GNP collapse.

(4) Horwitz lists a number of interventions Hoover introduced in 1931, such as the Reconstruction Finance Corporation, Home Loan Bank, Hoover’s executive order on immigration, enforcement of anti­trust laws, and so on. A number of them have nothing to do with Keynesian fiscal stimulus, and even those that do (e.g., Public Works Administration, direct loans to state governments) were done on a scale far too small to stop the Great Depression.

(5) Horwitz:

“On top of those spending proposals, … Hoover proposed, and Congress approved, the largest peacetime tax increase in American history. The Revenue Act of 1932 increased personal income taxes dramatically, but also brought back a variety of ex­cise taxes that had been used during World War I. The higher income taxes involved an increase of the standard rate from a range of 1.5–5 percent to the 4–8 percent range. On top of that increase, the act placed a large surtax on higher-income earners, leading to a total tax rate of anywhere from 25 to 63 percent. The act also raised the corporate income tax along with several taxes on other forms of income and wealth.”

It is most extraordinary that this is presented as if it is evidence that Hoover was a Keynesian. Raising taxes like this in a depression is contractionary fiscal policy. If anything, a true Keynesian would have passed large tax cuts in 1932, not raised taxes. Hoover on this policy action was no Keynesian.

(6) Finally, Horwitz notes that some of the measures of the New Deal were already introduced by Hoover. Yet a number of the elements of the New Deal had nothing to do with Keynesian economics, and indeed Keynes himself denounced the National Industrial Recovery Act (NIRA). The New Deal was created by a hodgepodge of conflicting groups of ideologues and its programs were not all constructive from the modern Keynesian perspective at all.

(7) Finally, it is fascinating that Austrians like Horwitz never seem to look outside the United States at depression history. Those nations that recovered from the Great Depression or its aftermath rapidly and successfully – New Zealand, Japan and Germany – used large-scale fiscal stimulus:

3 comments:

4. Hoover's deficits were not big enough to "fill the gap" (which preposterously assumes that there is a "gap" that needs to be "filled").

5. The discount rate fell to 2% for four months in 1931, fell to 1.5% in 1931 for five months and then rose to 3.5% for the last three months of 1931.

There is still no evidence that either the 1920 or 1929 depressions were caused by a failure of the free market or that Keynesian stimulus does anything other than reinflate some prices at the expense of others and possibly re-start a period of unsustainable growth (1933-1937).

John Maynard Keynes, in 1925, wrote a pamphlet, "The Economic Consequences of Mr. Churchill". Keynes' title is a suggestion of his previous best-seller, The Economic Consequences of the Peace, another work in which Keynes foresaw the dire consequence of then current events. In the case of Churchill, Sir Winton was then serving as Chancellor of the Exchequer.

Britain had gone off the gold standard during World War I. Churchill oversaw the restoration of the gold standard, with the Treasury insisting on establishing the foreign exchange value of the pound sterling to its pre-war parity in gold. Apparently, according to Keynes, the market value was about 10% below that at the time. The foreign exchange rate of a currency combines with the general price level to determine the standard of living in terms of foreign goods. If the British wanted to maintain their then-current standard of living, and Churchill insisted on the pre-war parity, then prices and costs, including wages, must drop 10%. And this process of deflation could be expected to be resisted. In fact, widespread unemployment and general labor unrest were some of the economic consequences of Mr. Churchill.

I find it extremely absurd that there is still debate over government intervention and the Great Depression.

'There is still no evidence that either the 1920 or 1929 depressions were caused by a failure of the free market or that Keynesian stimulus does anything other than reinflate some prices at the expense of others and possibly re-start a period of unsustainable growth (1933-1937)."

I'm sorry but you are living in a fantasy land if you think the market isn't instable to begin with (this is not to say that instability is bad all the time, it is what makes the market work to begin with). Any sort of government spending would have helped the economy back in the 30's and 40's. There was an obvious problem of idle capital back then and it needed to be dealt with.